Bain & Co.: Buyout Shops Thinking Small

Buyout firms will target smaller companies, pushing the number of transactions up, the consultancy predicts.

NEW YORK (The Deal) -- After a disappointing 2013, the number of new investments in private equity is expected to rise in 2014, according to the latest global industry survey by consultancy Bain & Co. But with vast stores of dry powder to deploy and relatively few large assets for sale, buyout firms will likely try to put their money into smaller targets. As a result, barring an unlikely upsurge in big public-to-private transactions, such as Silver Lake's buyout of Dell, or 3G Capital and Berkshire Hathaway's (BRK.A) acquisition of H.J. Heinz Co., overall deal value will "probably not increase significantly."

Those are key conclusions from Bain's Global Private Equity Report 2014, which also noted that limited partners have been able to refresh their commitments to the best funds over the past year as money flowed back into their coffers. LPs enjoyed returns from realizations, initial public offerings and secondary share sales, as well as a record yield from dividend recapitalizations. While this has breathed new life into the fundraising campaigns of the top-quartile firms, limited partners have become much more selective and may not "re-up" with funds that only provided average or market-matching returns.

In addition, Bain partner Graham Elton noted that the gradual decline in the amount of dry powder left from pre-crisis funds raised in 2006 or 2007 has gone into reverse as new funds raised recently also need to be deployed.

The total dry powder across all asset classes as of the end of 2013 had grown to a record $1.077 trillion, compared to a previous year-end high of $1.056 trillion in 2008, well over a third of which was in buyout funds. Across all asset classes, 902 funds attracted $462 billion in new capital worldwide last year, an increase of 21% over 2012, with the amount of new money committed to buyout funds rising by 89%, to $191 billion and taking the deployable cash in buyout funds to about $400 billion.